Chapter 4, Problem 5PSA

To determine

Adjusting Entries:

The accounting entries which are passed at the expiry of an accounting year to change the closing balances of various general ledger accounts are adjusting entries. These are made to align the reported results and financial position of the business in accordance with the accounting framework, such as GAAP or IFRS.

Rules of Journal Entry:

• To increase the balance of account one needs to debit assets, expenses, losses and credit all the liabilities, revenues and gains including capital.
• To decrease the balance of account credit all assets, expenses, losses and debit all liabilities, revenues and gains including capital.

Perpetual Inventory System:

It is a inventory system wherein the accounts related to inventory are updated on each purchase and sale happening. Quantities of inventory are updated on continuous basis. This can be done by integrating the inventory system to order entry and to the retail sale point of system.

Gross Margin Ratio:

It means the ratio of gross profit earned to net sales. It represents the percentage of total revenue which company retains after deducting the direct costs linked with the goods produced. Formula to compute gross margin ratio is,

  $\text{Gross}\text{margin}\text{ratio}=\frac{\text{Gross}\text{margin}}{\text{Net}\text{sales}}$

Current Ratio:

It is ratio which gives idea about the company’s ability to pay it liabilities. Formula to compute current ratio is,

  $\text{Current}\text{ratio}=\frac{\text{Current}\text{assets}}{\text{Current}\text{liabilities}}$

Acid Test Ratio:

It measures the ability of company to use cash or its liquid assets or pay off current liabilities. Formula to compute acid test ratio is,

  $\text{Acid}\text{test}\text{ratio}=\frac{\text{Current}\text{assets}-\left(\text{Stock}+\text{Prepaid}\text{expenses}\right)}{\text{Current}\text{liabilities}}$

1.

To Prepare: Adjusting entries.

2.

To determine

To Prepare: Multi step income statement.

3.

To determine

To prepare: Single step income statement.

4.

To determine

To compute: Current and acid test ratio and gross margin ratio.